SohuTV Headquarter Relocates to Tianjin, Ready for an IPO?

We’ve written that Sohu is planning to spin off its video biz SohuTV before, and its move on video front is striding forward with an announcement of relocating the headquarter of the new SohuTV subsidiary to Tianjin’s Economic-technological Development Area (TEDA). CEO Deng Ye said, “SohuTV has been growing up fast over the past seven years and now it’s the critical period for us. The relocation is an iconic event marking our progress.”

Since the beginning of Chinese video market consolidation in the first half of this year, the soaring content costs have somehow dropped. Insiders thought that the relocation reflected that video services are still confronting with much burden including high costs and low profits and is in need of a restructure.

Content Costs

The contents cost has long been a heavy burden on the video sector. In the first half of this year, some video sites clubbed together in an aim to lower down content purchasing costs, including the Youku-Tudou merger, BesTV and Funshion tie-up and the SohuTV, IQiyi and QQ Video alliance, to name a few. Content costs had ever since then saw a steady slide in general though hottest dramas are still costly due to high demand.

Currently content costs tend to be stable with some are 50% cheaper than last year.

Profit Model

It’s already known that the cost structure of a typical copyrighted video sites is like this: content 40% + bandwidth 30% + operating costs 30%. Sohu CEO once complained that though the company paid a lot for copyrighted American TV plays, pirated videos still prevailed. Despite declining content costs, the market is still straining for profits.

Currently video sites generate most of their revenues from ads and users. But still some changes can be made. Further consolidation of the market can further bring down content and bandwidth cost.

On the other hand, we’ve seen some of these video sites tried to differentiated itself from the competitors, like SohuTV highlighted American TV series, Xunlei on movies and 56.com on UGC microfilms.

Future Consolidation

Right now there are still so many competitive players in the market. So on one hand, they’re under great pressure to convince users to pay for contents; and on the other hand, the sites can hardly raise ads rates and lower content costs because they don’t have a final say. So they are either waiting for rivals to exhaust their energy and quit the game, or they themselves quit. In the following three quarters, some services definitely will (kinda have to) hold hands together and scale up.